WHY I LOVE PRIVATE MONEY LENDERS

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WHY I LOVE PRIVATE MONEY LENDERS

Don ScottPro Member
Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

I started investing in real estate over 8 years ago and I have done all kinds of deals.  

I started as a landlord and buying Rentals.  Then, I started wholesaling and flipping properties (currently doing about 50 transactions a year over the last couple of years).  

I have also Owner Financed a couple of properties, own some Multi-Family (currently have a deal under contract and looking to close 3-4 more before the end of 2020), and a co-owner in a Tiny Home Park.  There is more, but this post isn't about that LOL...

I didn't actually start using Private Money until only 3 years ago!  I had a very good friend, who flips over 50 houses a year, tell me about Private Money Lenders and I haven't looked back!

Now, I fund the majority of my real estate deals with Private Money.

I’ve borrowed & repaid millions of dollars from my investors.

Not all of my deals have gone as expected, but if you do enough deals then you understand that is a part of the game.

I’ve lost money on a few here and there and I'm sure it will happen again.

But here’s what I’m most proud about in my real estate career: MY LENDERS HAVE NEVER LOST A PENNY!

So even when I’ve taken hits on some of my deals, my lenders have always received 100% of their capital AND Interest that was promised to them.

*And I will note that I have a fairly conservative/cash-flow approach to real estate and always have at least 3 exit strategies on every deal, just in case…if you're considering becoming a private lender, I would strongly encourage you to get to know your borrowers AND their investment strategy [critical]

**I apologize for the long post, I just wanted to share how my Private Money Lenders changed my life as an investor.

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Lisa Eckman
Lender · Member since 2019 · 114 posts · 29 votes
6y

I'm looking at offering private money loans and wonder if you can provide some advice on what's really necessary for me, as the lender, to protect my interests. Everyone's trying to keep costs to a minimum, so a lot of the safeguards might go by the wayside:

 - Is it really necessary for me to have an attorney involved?  

- Is it really necessary to have a new title policy when you have one dated within the last 6-12 months (for example, when the owner purchased the property initially and is now rehabbing)?  Yes, I know that something could have changed during that time.  But you can say that about a property that has a title policy as of a week ago. I guess the difference is that the title policy would pay up if necessary were you to have a current policy?  

I would have a 1st lien recorded on a property that has 65% LTV. However, tax and mechanics liens take priority. So there are always risks. Just trying decide what is truly necessary.

Thanks for your advice!

Lisa

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  • Steve HiltabiddlePro Member
    Lender · Pennysylvania · Member since 2018 · 139 posts · 68 votes
    6y

    @Don Scott  Thanks for posting this thread.  After a year of surface education in real estate through the many resources available (BP, podcasts, networking, more podcasts, books, etc) I realized I needed to stop spinning and focus.  My focus in 2020 will be private lending because I think that is the best place for ME to start.

    What I feel I do know:

    Use your own documents drafted by an experienced attorney who knows how to protect you as a lender

    If you don't have rehab experience find good inspectors to help ensure the SOWs are solid and to assist with draws.

    If you're new, get appraisals to ensure your borrower didn't overpay for the property and the ARV isn't over exaggerated.

    I hope that by partnering with good flippers, I'll find the opportunity to expand my investing where I can build a portfolio. But for now, it'll be focus and that focus will be working with experienced flippers/rehabbers.

    Also, if you want to learn about private lending a shout out to @Keith Baker  who hosts the Private Lender Podcast www.privatelenderpodcast.com

    1Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y

    @Senut Lash

    I typically pay interest only during they time that I am borrowing the money. Depending on the deal, I will insure the lender gets a minimum of 3 months of interest... the only way the lender makes money, is if I’m using it. You have to make it a win for your lenders as well!

    2Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y

    @Dontavious Dawson - I’ve never discussed that, but I suppose it would be up to the risk tolerance of the lender and the deal.

    1Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y

    @Glenda Smith starting on Bigger Pockets or networking events would be a couple of good places to start.

    2Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y

    @Steve Hiltabiddle I was just at a class yesterday with Keith. I got caught up in networking and he was gone before u could get a chance to speak with him. Lol

    0Reply
  • Krishnan T.
    Real Estate Professional · Tampa, FL · Member since 2017 · 104 posts · 47 votes
    6y

    @Don Scott Thanks for sharing your experience! As a borrower do you look at overall cost for you? For example, would you consider borrowing from first time lender if the paperwork looks good to you? 

    0Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y
    Originally posted by @Krishnan T.:

    @Don Scott Thanks for sharing your experience! As a borrower do you look at overall cost for you? For example, would you consider borrowing from first time lender if the paperwork looks good to you? 

    @Krishnan T As an investor with an accounting background I pay attention to the numbers.  However, I believe in building relationships, and even lenders have to start somewhere.  I have a few lenders that I still work with, and their first deal they ever invested in was with me.

    1Reply
  • Kurtis Bush
    Specialist · Atlanta, GA · Member since 2020 · 5 posts · 0 votes
    6y

    @Don Scott thanks for sharing Don. Could you elaborate on the 3 exit strategies?

    0Reply
  • Marlon Jackson
    Wholesaler · Dallas, TX · Member since 2019 · 95 posts · 28 votes
    6y

    @Don Scott your story is an inspiration to me searching for my own success. Thank you bro

    1Reply
  • Don ScottPro Member
    OP
    Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
    6y

    @Kurtis Bush

    When I mentioned 3 exit strategies; I meant flip, rental, or wholesale the property.

    For example: I close on a property to flip it, but something happens like the comps come down and I can’t meet my projections and I would lose money to sell it. Instead of taking a loss on the deal, I can refinance the property with a conventional lender. That would pay off the private lender and get them their cash back, and I now own a new rental property. :)

    2Reply
  • Dennis Kordie
    Montclair, NJ · Member since 2018 · 2 posts · 1 vote
    6y

    @Don Scott Thanks for sharing.

    1Reply
  • Lisa Eckman
    Lender · Member since 2019 · 114 posts · 29 votes
    6y

    @?Joseph Walsh, "Instead of just "you'll get 10% interest every month, and when I sell/refinance, I pay back your investment in whole".  Wondering about the figures here... 10% per month to me means (for example, on a loan of $1000), $100 for the MONTH.  But 10% per annum means $100 over the course of 1 year.  Can you (Joseph) or anyone else clarify this for me?  Not sure if it's just a wording thing, but I like to back it up with a specific example to be clear.  Thank you!

    1Reply
  • Account Closed
    Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
    6y

    Hey @Don Scott,

    This is the smartest post I’ve ever seen:)!! Quick question; I just paid back in full my first private money loan. It was only $10k @ 15% which helped me close a foreclosed home for $12.2k. It was super relaxed and we had his banker sister do the docs. Is 15% way too much for private $? I was happy with how easy going everything was, and that it helped me close a property, but I’d like to know what you would consider normal or what you like to see.. I’ll never regret this first deal because of the speed it gave me to close a deal.

    1Reply
  • Lisa Eckman
    Lender · Member since 2019 · 114 posts · 29 votes
    6y

    @Derrick Alexis At this point I'm not really sure.  And I guess I'd have to say it really doesn't matter as long as the numbers make sense.  But I guess that's where it gets a little tricky.  If it's an area I know nothing about, it will take me a longer and more effort to determine if the numbers do make sense.  As you can tell, I'm pretty new to private lending, and I'm just learning the ropes.

    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    6y

    My wife and I have been loaning our hard-earned money privately to the local house flippers for ten years now. A few things to add and to clarify:

    1) No sane borrower buys property without purchasing owner’s title insurance. Your lender’s title policy will be part of that. You will have to learn to read the preliminary title policy and specify each lien that gets paid off when your loan closes. The buyers title policy protects them from unknown/undisclosed liens, among many other issues. The lender’s title policy is different. It protects your loan position. This is so no one can claim to be in first position when it was your loan that was recorded first, etc.

    Loan priority and lien payoff are specified in your lender instructions. This is a very important document you provide to escrow, title, or the closing attorney, as appropriate.

      2) If you are lending on flips, make sure your borrower has a vacant dwelling policy, with replacement cost, naming you as the Mortgagee, as well as builder's risk. A regular homeowner’s policy will not cover either of you. I find insurance binders maddeningly cryptic and I rarely understand what the borrower purchased. Always call the insurance company to confirm.

      3) I don’t care that your attorney reviewed them, never use loan documents obtained from a borrower. As important as what’s in their docs is what’s not. Rather than pay an attorney to start adding terms which protect you to someone else’s docs, start with a set that was prepared with you in mind as the lender. You will pay a lending attorney once for this. Note: A lending attorney is not the same as a real estate attorney.

      I’m only half joking, but rest assured that when you sign our loan documents, as your pen barely lifts from the paper, you are probably already in default for something.

      4) I cringe when some here write that private lenders can’t loan on an owner-occupied property. With exception of multi-family loans, owner occupancy is completely irrelevant. You should learn the difference between a consumer purpose loan and a business purpose loan and how the use of the money determines that. It’s more appropriate to write that the majority of private/hard money lenders can or will only make business purpose loans (which can be owner occupied).

      5) The most important advice I can give to any aspiring lender is to only loan locally to experienced flippers and only to those you’ve personally met and gotten to know, like, and trust. Know, like, and trust is the ultimate real estate cliché but something we live by.

          5Reply
        • Derrick Alexis
          Rental Property Investor · Philadelphia, PA · Member since 2018 · 38 posts · 2 votes
          6y

          @Lisa Eckman Completely understood, I will direct message you. Hopefully we can clear one another up in regard to the topic

          0Reply
        • Lisa Eckman
          Lender · Member since 2019 · 114 posts · 29 votes
          6y

          @Jonathan Greer I take it the home wasn’t in the San Diego area. ;). Where are you investing? What was the length of time you borrowed the money for if I can ask? Was 15% the annualized rate or ? Thanks.

          0Reply
        • Lisa Eckman
          Lender · Member since 2019 · 114 posts · 29 votes
          6y

          @Dave DeMarinis thanks for the advice. I get what you’re saying, but how would I go about finding an attorney in Ohio to either draw up or review docs?

          1Reply
        • Dave DeMarinis
          Lender · Santa Rosa, CA · Member since 2017 · 283 posts · 255 votes
          6y

          @Lisa Eckman where in Ohio? DM and I can refer you to an attorney. I grew up outside of Cleveland.

          1Reply
        • Dave DeMarinis
          Lender · Santa Rosa, CA · Member since 2017 · 283 posts · 255 votes
          6y

          @Lisa Eckman the interest rates are quoted annually. Payments can be however you want but the most common is interest only, paid monthly.

          I.e. Borrow 100,000 at 10% and each month pay 10%*100,000/12=$833.33

          Second most common is a flat %.

          I.e. Borrow $100,000 at 10 points and you pay back $110,000 when refinance or sell. This would certainly be a 100 year term.

          It is up to lender and borrower if they want to guarantee a minimum interest or early payment penalty, etc. I personally don’t do either of those because the best business result for the borrower is to be in and out as quickly as possible.

          Regarding the question about 15% being too much. You really have to look at the loan amount. What are the total interest $ and what is the annual interest rate. For small loans, the % needs to be high to make sense. Many lenders will have a minimum $ return to make it worth their while. They will often waive that for an investor they regularly fund but probably not a first timer.

          Hopefully that helps.

          0Reply
        • Don ScottPro Member
          OP
          Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes
          6y

          @Jonathan Greer

          I wouldn’t say the 15% you paid was too much. It was a small amount and the most important thing is you and your lender were both happy with the terms! You closed your first deal and the lender made a great return on their money. The true definition of a win-win!

          1Reply
        • Keith Baker
          Lender · Houston, TX · Member since 2017 · 6 posts · 2 votes
          6y

          @Steve Hiltabiddle thanks for the shout out!  And @Don Scott I hope to attend next week's Quest meeting as well

          1Reply
        • Account Closed
          Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
          6y

          Hi @Lisa Eckman, I wish the home was in San Diego! I worked for very competitive flippers in San Diego, but decided I'd rather explore other markets that fit my budget. I'm finishing one flip in Greeneville, TN and one near a vacation rental market off the Blue Ridge Parkway in VA. The one in TN we used Prosper lending at 16% on a $15,000 loan for a 3 yr period which we just paid off after 13 months. The other was private money for one year at 15% which we just paid off on time. Interest was $375 paid quarterly for a $10k loan totaling a $1500 ROI for the investor. We also penciled in 1% on the sale to him to make it a little more exciting. As for markets, we came out here to explore Sevierville/ Gatlinburg and also Charlotte, NC. We're hoping to move to new construction as that fits my background too. I think the interest may be a little high on these, but for small loan amounts and what we were able to do with the money, it was win win and we're willing to do that as we're entering the space. What markets are you interested in? Do you think these rates sound fair?

          1Reply
        • Eric Brown
          Member since 2020 · 1 post · 0 votes
          6y

          @Don Scott thank you so much for sharing, and best of luck in the new year!

          0Reply
        • Account Closed
          Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes
          6y

          @Don Scott totally. Thanks

          0Reply
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